When will everything get back to normal? It won’t

Here are four reasons things might never go back to normal:

  1. Structural adjustments

    The economists who first used the term hysteresis observed that, even after recovering from a major recession, the unemployment rate was typically higher than beforehand. This long-term “scarring” effect was thought to be caused by a variety of factors, such as loss of skills, reluctance to invest, and adjustment costs in rebuilding.

    In today’s economy, the risks of structural hysteresis are clear. If retailers, hospitality and travel companies are allowed to go bankrupt, the rebuilding costs will be huge and the impact on communities will be long-lasting. This is of course why governments are spending a fortune on furlough and loan schemes to keep such businesses going. But even with these generous schemes, some businesses will perish. We have already seen many high-profile casualties such as Debenhams and Arcadia in the UK, and Neiman Marcus and JC Penney in the US. Hysteresis can be reduced, but not eliminated: the high street of shops and restaurants is going to look quite different a few years from now.

    Interestingly, platform businesses like Uber, Deliveroo and Airbnb are much more resilient. They have been widely criticised for not providing job security to their workers but their low fixed-cost business model makes them highly resilient to an external shock, because they can flex their capacity up and down at a moment’s notice. They provide a buffer against hysteresis. Of course, governments still need to support unemployed workers when demand dries up, but the costs of bankruptcy and restructuring can largely be avoided.

    Practical tips:

    • Convert fixed costs to variable costs. The more turbulent the business conditions, the more you want to rely on contract workers and partners, so you can flex them up or down according to demand.

    • Don’t cut too hard on your investments in intangibles. Research by Ioannis Ioannou and colleagues from the financial crisis showed the companies that weathered the storm best were aggressive at cutting costs but not in R&D and stakeholder relationships.

  2. Changes in consumer behaviour

    There have been obvious changes in consumer behaviour since the pandemic started, and while some are clearly temporary (I don’t want to meet my friends for a drink over Zoom – I want to go to the pub) others are likely to endure because they are efficient (online shopping) and/or enjoyable (movie streaming).

    Of course these changes are part of the broader digital revolution that has been underway for twenty years, and it is rightly argued that the pandemic accelerated the adoption of new behaviours around purchase and consumption. But it’s worth underlining that the impetus for these new behaviours came mostly from the supply-side of the market. For example, universities had always insisted on in-class learning, and estate agents had required in-person viewings before selling a property, but they quickly figured out online alternatives as a means of staying afloat. But the chances are they won’t be able to reverse these new ways of working post pandemic, even if they wanted to. The cat is out of the bag. It seems likely we will end up in a physical-digital hybrid world in many sectors. For example, university students can look forward to getting more of their basic classes online, with advanced classes, tutorials and practical sessions face to face.

    Practical tips:

    • Understand what’s changed in your transactions with users. Most businesses aren’t just “products” or “services” they are a combination of the two. As a general rule, most service transactions benefit from the human touch whereas most product transactions do not. So its worth mapping your online user journey and comparing it to what happened before, to help you figure out which changes will endure.

    • What business are you in? The pandemic allows you to ask this question afresh, and perhaps to come up with some surprising insights. For example, the education industry – which used to bundle networking, certification and tuition into a single offering – may never be the same again.

  3. Changes in workplace behaviour

    The wholesale shift to virtual working for formerly office-based employees was no less dramatic, and was also driven by necessity rather than expectation or demand. We now have a good understanding of how effective this huge social experiment has been. Most of us are at least as productive as before, our ability to get things done, especially tasks than can be easily subdivided, has improved, and opportunities for online learning are plentiful. On the other hand, creativity and collaboration are being stifled, resolving tricky personnel issues is more difficult, and the opportunities for professional development – for example taking on challenging new assignments – are fewer than before.

    While a few companies have pledged to allow virtual working to continue post-pandemic, most are gearing up for a hybrid model, with people working from home maybe half the time, and careful consideration being given to getting the most out of their time together in the office. There is a clear hysteresis effect here, though driven more by an efficiency imperative than by the needs or desires of workers.

    But the knock-on effects for the economy are huge. If the commuting levels in major cities like London fall by 20-30% post-pandemic, the impact on commercial real estate, fast-food chains and pubs, train services, indeed the whole paraphernalia of services that proliferate in major city centres, all of this will need re-evaluating. Looking across all the long-term effects of the pandemic on society, this may end up being the most significant.

    Practical tips:

    • Put some structure around the hybrid working arrangements for your staff. Make sure people are in the office for the collaborative, innovative and social-type activities that really benefit from face to face contact. You can be more relaxed about where they do their own individual work, and indeed many of their meetings.

    • Actively manage professional development. Especially while most people are working from home, you need to find ways of giving them new experiences, sometimes in areas they are less competent at. Its good for their long-term development, and for their short-term sanity.

  4. Government rules and regulations

    Finally, how will government rules and regulations change things post-pandemic? As already noted, the government’s first economic (rather than health-related) task was keeping the whole system from collapse, and as soon as that is resolved, their next task will be to find ways to pay for their interventions – which will mean higher taxes and tighter public spending for years to come.

    But there are other likely areas of government intervention that will hinder a return to normal. One will be a reluctance to relax the new rules. Just as the pilot doesn’t turn off the “fasten seatbelt” sign until the turbulence is long gone, we can expect the strict rules on social distancing and travel to endure for months or even years after the danger has passed.

    There are also signs of governments using the pandemic as a window of opportunity, to bring in new regulations that might have otherwise encountered resistance. Cities such as Paris and Madrid have built new cycle routes, Athens is carving out new public spaces where cars used to flow. The dramatic reduction in energy usage during the pandemic has emboldened the EU, among others, to set ambitious targets for emission reductions.

    We might also see new policy interventions in some sectors. The competition authorities were circling Google, Facebook, Amazon and Apple even before the pandemic put them in more dominant positions. The pressure for policy activism will increase, especially in Europe. Digital services taxes and anti-trust cases are on the way.

    Practical tips:

    • Be prepared for restrictions on movement to stay in place for a long time to come. Even when we as individuals are happy to mingle in crowds and travel again, governments and large companies will always err on the side of caution.

    • Be proactive about rethinking your physical footprint. The benefits of having your offices in a large city centre are fewer than they used to be, and that will be an enduring effect.

Two differences that look likely to stay

So what will the next few years be like? Basic human nature hasn’t changed, so we will revert to most of the activities and behaviours that kept us busy before the pandemic. But with two important differences.

First, there will be more constraints on how we live. After 9/11 we flew just as much as before, but security was stricter. After the SARS epidemic, people in Asian countries became accustomed to mask-wearing and more health-checks. After the global financial crisis, banks quickly got back into their groove, but with vastly more regulations and government oversight. We don’t know exactly how this will play out, but we can expect greater government involvement in our day-to-day lives than before.

Second, the digital revolution just got a turbo boost. Any resistance to change dissolved in a few short weeks back in March, and the potential benefits of doing things digitally became apparent. And these changes will stay with us. The initial effect will be a myriad of small adjustments to our daily lives -shopping, paying, learning, interacting – where we shift to digital by default. But there will also be a knock-on effect on cities, airlines, and hospitality services, as they adjust to the consequences of workers spending more time in their home offices.

When times are tough, it’s only natural to wish for a return to normality. But we live in a complex and interdependent world, so nothing is ever quite the same as before, even after the storm has passed. What exactly the new normal will look like is uncertain, but the concept of hysteresis at least gives us a way forward. It tells us that some of the changes we have had to make are actually beneficial, and should not be reversed.

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